Canadian Economy Cautiously Golden

Canada’s economy is showing a robust upturn with official figures pinning growth at 5% in the last quarter of 2009, outstripping predictions for more modest growth.

The news from Statistics Canada is a welcome indicator that Canada, like the US, is bouncing back from the devastating recession that has sent economies tumbling worldwide.

This marks the strongest growth since 2000, well above the 4.1% growth predicted by analysts for the end of 2009, and soaring past third quarter gains of just 0.9%.  The US also announced strong recovery numbers, with its economy expanding by 5.9% for the same period.

Real Estate and Spending Drive Growth

Exports and real estate transactions played a key role in the recovery, with the housing market showing strong gains through 2009.   January’s figures showed sales increased 87% over the same period in 2009, and home prices are up an average 20% nationwide.  Consumer confidence has also increased, with consumer spending driving the economy upward.

This thanks to government spending, and affordable credit – the Central Bank slashed interest rates to historical lows through the economic downturn to stimulate spending, offered tax breaks for new homebuyers and alternatives means for establishing down payments.  As a result, buyers have crowded the market to take advantage of cheaper mortgages. 

The good news however comes with some fallout – the loonie has marked even stronger gains against the US dollar, threatening to flatten exports, the majority of which head south of the border.  Inflation also looms; with the stimulus effect achieved, the federal government will now be under pressure to raise interest rates to control inflation.

Interest Rates Still Low, but Hikes to Come

Thus far, the Central Bank has committed to keeping rates low, and the latest rate announcement has kept that pledge – rates remain firmly at a record-low quarter basis point.  However, should inflation rise, as it’s widely expected to do and soon, the Bank of Canada will have no choice but to raise rates to curb inflationary pressures.

Some analysts are predicting major hikes will be necessary to do this – as much as 50 basis points each announcement, through to midway next year.  Others say waiting too long risks sending inflation out of control, and the measures needed to rein it back in may be draconian, and quash a still-fragile economic recovery.

Record Deficit Calls for Government Spending Freeze

Despite the strong year-end gains, 2009 still saw economic contraction in Canada, with the economy shrinking 2.6% over the previous year, and government stimulus packages have created a major deficit that will need to be corrected.

Prime Minister Stephen Harper presented a budget in early March that would slash government spending and reverse the record deficit of $53.8 billion, or roughly 3.5% of GDP, by 2015.  However there are concerns that an abrupt end to government aid may further shock the embryonic recovery, which will likely face pressures from the necessary interest rate hikes.

Mr Harper has maintained his pledge not to raise taxes to relieve the deficit.